Economics of a Crash

This month has seen something that happens not very often: it appears to be the early stages of a global stock market crash.

For the moment investors are in shock, seeking reassurance and keenly intent on preserving their diminishing assets, instead of reflecting on the broader economic reasons behind it. To mainstream financial commentators, blame for a crash is always placed on remote factors, such as China’s financial crisis, and has little to do with events closer to home. Analysis of this sort is selective and badly misplaced. The purpose of this article is to provide an overview of the economic background to today’s markets as well as the likely consequences.

The origins of a developing crisis are deeply embedded in the financial system and date back to the invention of central banks, and more particularly to the Bretton Woods Agreement, which was the basis of the post-war monetary system. In the 1940s government economists were embracing the new Keynesian view that Say’s law, the law of the markets, was irrelevant and supply and demand for goods and services could be regarded as It is an important conclusion. In effect, it posits that the only solution open to central banks is the deliberate destruction of their own currencies, not on the drip-feed basis that has existed since the Bretton Woods Agreement, but by a more deliberate acceleration. We cannot judge whether this will work one more time, postponing a final crisis. But we can see the circumstances ahead of us more clearly, and we can more easily imagine central bankers being drawn into repeating the mistaken policies of Rudolf Havenstein, president of Germany’s Reichsbank in 1921-1923. In predicting this final crisis for any country that treads down the path of government corruption of its money, the economist von Mises described its manifestation as a crack-up boom, the boom to end all booms, when ordinary people finally realise the worthlessness of government currency and dump it as rapidly as possible for anything they can get hold of. The last vestiges of the currency’s objective exchange-value evaporate.

The hyperinflation of fiat money and the prospect of a final collapse in its purchasing power is becoming an increasingly probable outcome of the financial events unfolding today. That much can be deduced from sound economic theory, and is confirmed by historical records of similar crises. We can also expect this outcome to be made certain by the misguided faux-science of macroeconomics, which bases itself on the denial of Say’s law and which badly misleads government policy-makers.

Only this time the threatened currency destruction will be global, because where the dollar goes, and the dollar is still the reserve currency, so we all go.

Reprinted with permission from GoldMoney.